I am having a similar problem. I have not yet tried to set the user with no password, but I may be able to help you with the MySQL error you get with phpMyAdmin. MySQL version 4.1 and greater uses a longer password hash. This causes some programs not to be able to get the correct information. You can fix this problem by using the old password style, which is a little less secure. For more information however take a look at the following article: http://dev.mysql.com/doc/mysql/en/Old_client.html
-Jorge Perez